Thread by @Wamagaisa

1. One general rule that I have learnt purely by experience as a Zimbabwean is that there is a positive correlation between more decrees to control the foreign currency (forex) market and the expansion of the parallel (black) market.

https://twitter.com/ReserveBankZIM/status/1398750946688221188

2. In other words, the more the government tries to command & control the formal market by decree, the more the informal/parallel market grows. This is partly because economic actors seek to avoid the debilitating & punitive impact of the formal market decrees.

3. It also grows because formal market controls create opportunities for arbitrage. This happens because the formal market, access of which is restricted to a few, offers cheap forex which can be sold at higher rates either directly on the parallel market or as goods for sale.

4. It’s usually the case that beneficiaries of these cheap schemes are PEPs (Politically Exposed Persons). They simply buy forex from government & sell it on the parallel market. It’s a trick that’s been used for decades. The Willowgate Scandal was based on the same principles

5. PEPs bought imported vehicles at cheap rates from a government company & sold them for huge profits. It’s been happening at great scale since the 2000, leading to record hyperinflation in 2007-08. The government thinks more controls will solve it. This is wishful thinking.

6. If the government were a doctor, it’s diagnosis would be awful. The issue lies in the old laws of supply & demand. There’s more demand for forex which can’t be met by supply. If there were adequate forex supplies, there would be no need for these stringent decrees.

7. As long as it is supplying forex at artificially low rates, there’s always an opportunity for arbitrage because there’s someone out there who needs forex or goods & is prepared to pay a higher rate for them. Government therefore is the supplier to the parallel market.

8. Government is trying to direct the market but as always happens, the market will devise ways to dodge the rules. One prediction is that we will end up with a shortage of certain goods in formal shops, but an abundance of them on the street but sold at parallel market rates.

9. Those who can afford it will hoard goods at controlled rates and sell them on at parallel market rates on the street. “The street” is both literal & metaphorical. Since the controlled rate is rigged, government has effectively imposed price controls. It always ends in tears.